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Should your city build a headquarters hotel?

By CityObservatory Guest

6.4.2015

Around the nation, tourism officials are pushing the construction of publicly subsidized “headquarters” hotels to help fill publicly subsidized convention centers. One person who has tracked this industry carefully is University of Texas at San Antonio professor Heywood Sanders, author of the recent book, Convention Center Follies. In this commentary for City Observatory, Woody shares his insights on the lofty expectations and less than optimal outcomes that plague many of these economic development schemes.

by Heywood Sanders

Des Moines wants a convention center hotel. With the argument that its “convention space is not able to live up to its potential due to the lack of an attached hotel,” Des Moines and Polk County officials are seeking a $39 million grant from the state to partially finance a $101 million, 330 room hotel. Des Moines officials are certain that a new hotel will produce a boom in local convention business, based on a consultant study. In Sioux City, they want a convention center hotel too, one with 150 rooms, as part of a planned entertainment and retail district downtown. Armed with a 173-page consultant study, Sioux City wants a piece of the same state grant funds. In Muscatine, city officials are seeking state grant dollars for a 112-room hotel and conference center in the heart of their downtown.

Savannah, Georgia wants a convention center hotel too. They have a consultant study that proves it will bring an increase in convention business. Atlanta wants a really big one, circa 800 to 1,200 rooms. Ft. Lauderdale wants one, and so does Irving, Texas, Pittsburgh, and Portland, Tacoma, and Salt Lake City. With a host of cities around the country, large and small, struggling to fill their convention centers in an overbuilt market, local officials have been told the same tale—in order to compete as a convention destination, in order to make your convention center perform, you need a big “headquarters hotel” next door. As one consultant recently put it, “Convention centers without one need one. Those without enough [hotel rooms] are planning more.”

These cities would join a long list of other communities, from Baltimore and Washington, to Columbus and Cleveland, to Omaha and Denver that have received the same consultant advice and have pursued their own efforts to develop a major new hotel. And when attempts at securing private investment in a convention center hotel have failed, these communities have then gone into the hotel business, financing a new hotel with tax-exempt municipal bonds usually backed by tax revenues. The promise from the expert consultants is that a new hotel will boost the city’s convention business, neatly filling the new hotel rooms and thus a sure bet as a public investment. Then there is the story of Phoenix.

The new, 1,000-room Phoenix Sheraton, financed by the city and backed by a city tax revenue stream, was supposed to be neatly filled by the over 220,000 additional convention attendees brought to Phoenix each year by its $600 million convention center expansion. By 2014, the Sheraton hotel was forecast to hit an occupancy rate of 69 percent, at an average daily rate of just under $200. Things didn’t quite work out that way. Last year the hotel only managed occupancy of 57.5 percent, at a rate of $146.93. Looking at the hotel’s bottom line is even grimmer. The new Sheraton was forecast to generate net revenues in 2014 of over $29 million—more than enough to cover the $22.2 million in debt service. But the hotel actually produced only $11.9 million in net revenues, forcing the city to use more than $12 million in other tax dollars to support the hotel.

Things in Phoenix went wrong for a series of reasons, including the Great Recession. But perhaps the most central (and pervasive) problem for Phoenix lay in a series of overly optimistic consultant studies on the performance of the expanded convention center and adjacent hotel.

A 1999 study by PriceWaterhouseCoopers forecast that a bigger convention venue would boost annual convention attendance by 85 percent, giving Phoenix the ability to host two large conventions at one time. A March 2003 analysis by Ernst & Young promised that the bigger center would see convention attendance grow from the then 125,000 to a forecast 376,861 each year. Hotel consulting firm HVS then took that forecast of 375,000 annual attendees to project 289,282 new hotel room nights in the downtown Phoenix hotel market annually. That new room demand would be more than enough to fill up the proposed 1,000 room Sheraton, and spill over to other downtown hotels.

Unfortunately, things did not work out quite as the consultants had assumed. The expanded Phoenix Convention Center held its grand opening in December 2008, two months after the new Sheraton opened for business. Just two years later, in December 2010, the Moody’s bond rating agency downgraded the hotel bonds. The early portents on the center’s performance had been good, hosting the NBA All-Star Game’s Jam Session in February, followed by the National Rifle Association’s national convention in May. But for fiscal year 2009 (ending June 30), the center managed to attract 284,586 convention attendees—decidedly fewer than 375,000 but a sizable increase nonetheless. It would stand as a high water mark.

The center reported convention attendance of 229,097 in fiscal 2010, and 156,126 the next year. For 2013, the reported attendance was 165,370, with an estimated 173,000 in fiscal 2014. At a cost of $600 million, the expanded Phoenix Convention Center was producing about the same attendance levels Ernst & Young had reported for its predecessor in 1996 and 1997.

Without the boom in convention attendees to fill the Sheraton, the hotel has struggled, with occupancy rates in the 50 percent range since 2010. Even as the impact of the Great Recession has ebbed since 2009, the hotel’s average daily rate has not budged at all, with the 2014 rate of $146.93 still below the $163.90 it managed in its first year.

The Phoenix tale is not unique. A great many publicly-financed hotels, including those in Baltimore, Myrtle Beach, Overland Park, KS, and Omaha have seen faltering performance and downgrades by bond rating agencies. One hotel, the St. Louis Renaissance Grand, failed so spectacularly that it went into default and was ultimately sold for a fraction of its development cost, at substantial loss to the bondholders.

The notion, whether in Des Moines or Pittsburgh or Boston, that a big new hotel is some kind of magic elixir to make a city more successful in the enormously competitive convention business, is based far more on hope than reality. Even with a consultant study.